Financial Institutions – Key Provisions of the CARES Act

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The Coronavirus Aid, Relief and Economic Security (CARES) Act contains several key provisions affecting financial institutions, in addition to its various loan programs. The purpose of this article is to highlight several of these provisions along with our current observations in this rapidly evolving area.

The first is section 4012 Temporary Relief for Community Banks. In general, this section states:

  1. The Community Bank Leverage Ratio shall be 8 percent; and
  2. A qualifying community bank that falls below the Community Bank Leverage Ratio shall have a reasonable grace period to satisfy the Community Bank Leverage Ratio.

EFFECTIVE PERIOD.—the temporary relief shall end on the sooner of the termination date of the national emergency concerning COVID–19 or December 31, 2020.

Section 4013 Temporary Relief from Troubled Debt Restructurings provides institutions with the option to:

  1. Suspend the requirements under US GAAP for loan modifications related to COVID–19 that would otherwise be categorized as a troubled debt restructuring; and
  2. Suspend any determination of a loan modified as a result of the effects of COVID–19 as being a troubled debt restructuring, including impairment for accounting purposes.

The relief under Section 4013 shall be applicable for the term of the loan modification, but solely with respect to any modification, including a forbearance arrangement, an interest rate modification, a repayment plan, and any other similar arrangement that defers or delays the payment of principal or interest, that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019.

It is noteworthy that the CARES Act language refers to the delinquency status as of December 31, 2019 rather than on the date the loan is modified. This may be the intent of the Act or a provision that needs further refinement as the Act’s details are analyzed.

The applicable period under Section 4013 relates to modifications entered into during the period beginning on March 1, 2020 and ending on the earlier of December 31, 2020, or the date that is 60 days after the date on which the national emergency concerning COVID–19 terminates. Theoretically, these provisions would seem to allow for a deferment period exceeding 6 months that could last until December 31, 2020. This is another provision that may need further refinement.

Section 4014 Optional Temporary Relief from Current Expected Credit Losses provides institutions the ability to suspend compliance with CECL beginning on the date of enactment of the CARES Act and ending on the earlier of the date on which the national emergency concerning COVID–19 terminates or December 31, 2020.

We will keep you posted as further information becomes available. As always, please do not hesitate to contact us with any questions at all that you have related to these provisions of the CARES Act or anything else caused by these uncertain events. We are here to help in any way we can.

For more information or a discussion on how this may impact you, please contact Jeff Skaggs or your BNN advisor at 800.244.7444.

Looking for more?

CHECK OUT OUR COMPREHENSIVE GUIDE TO THE TAX PROVISIONS OF THE CARES ACT.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.